FEDERAL RESERVE BANK OF KANSAS CITY

On The FALL 2005

Cover:THE GREENSPAN ERA LESSONS FOR THE FUTURE...... 18 During his years at the helm of the Federal Reserve System, Chairman Alan Greenspan has been at the center of discussions on monetary policy ideas and issues. This year the Federal Reserve Bank of Kansas City’s 29th economic policy symposium focused on lessons of his tenure and how they can guide central bankers for years to come.

FEATURES CLOSING THE GAP: COMMUNITY COLLEGES EMERGE AS ADVANTAGE FOR RURAL LEARNING ...... 4 While rural students are pursuing diverse careers, what many have in common is their choice of educational institution: community colleges. A BREACH OF TRUST: PROTECTING PRIVACY IN THE AGE OF ELECTRONIC PAYMENTS ...... 8 Questions concerning data security have been around for years, long before a number of breaches this year resulted in millions of consumers’ personal data being exposed. How do financial institutions best protect consumers? ‘IF YOU BUILD IT, THEY WILL COME’: ENTREPRENEURSHIP AND COMMUNITY DEVELOPMENT 12 Oklahoma City’s Bricktown neighborhood’s economic success is home-grown. Is the city’s model of fostering an entrepreneurial environment an example from which other communities could learn?

HOUSE AND HOME: THE SURGE IN DENVER’S LOW- AND MODERATE-INCOME MORTGAGE LENDING ...... 26 Changes in Denver’s home lending and mortgage markets have been spurred on by a number of factors. But how have local families with low and moderate incomes fared in obtaining financing and increasing their rate of home ownership?

DEPARTMENTS 1 PRESIDENT’S MESSAGE 32 NOTES 34 ABOUT... 37 FED DIRECTORY President’s message

The Jackson Hole Symposium he Federal Reserve Bank of Kansas “Monetary Policy City hosted its 29th annual economic Issues in the 1980s” was policy symposium in late August. the first step toward the T Once again, our Bank was honored to symposium’s current host in the Tenth Federal Reserve District a structure. Held for the distinguished gathering of central bankers, first time at our now-tra- policymakers and economists. ditional location of Over the years, we believe the symposium Jackson Hole, Wyo., the has provided a valuable forum for the exchange 1982 symposium was the of ideas on important public policy issues of first to be attended by a interest to central banks around the world. The Federal Reserve chair- symposium’s continuing success is due to the man, then Paul Volcker, contributions of all those who participate, and the first to include including authors of the papers presented dur- international central ing the symposium, discussants, panelists and bankers, with presentations by representatives audience members. from the Bank of Canada and the Deutsche Generally, the symposium does not focus on Bundesbank, the German central bank, which, the immediate issues facing policymakers. in 1982, had the distinct address of West Instead, we look to create a discussion about the Germany. broad issues that monetary policymakers around In 1990, the symposium provided policy- the world will face in the months and years to makers with a unique opportunity months after come. Symposium topics in recent years have the world witnessed the fall of the Berlin Wall. ranged from the economic impacts and policy “Central Banking Issues in Emerging Market- challenges of global demographic change, to eco- Oriented Economies” included presentations by nomic policy for the information economy. seven Eastern European central bankers and the This year’s event, “The Greenspan Era: chairman of the board of the State Bank of the Lessons for the Future,” was attended by lead- U.S.S.R. that focused on economic reform pro- ers from 28 of the world’s central banks, a grams underway in each of those nations. group literally spanning the globe from Presentations from Western economists were Argentina to China and including a number of focused on possible solutions to the problems U.S. Federal Reserve Bank presidents, gover- identified by the central bankers. At a unique nors and economists. juncture in world history, the 1990 symposium The origin of our economic symposium helped to further the dialogue between policy- dates back to 1978 when the Bank hosted makers in the East and West. “World Agricultural Trade: The Potential for Policymakers were again offered a unique Growth” in Kansas City. opportunity during our 1997 symposium, The symposium would retain its agricultur- “Maintaining Financial Stability in a Global al focus for the next three years until the initial Economy.” Although the symposium had been monetary policy symposium was held in 1982. —continued on page 2

FALL 2005 . TEN 1 Federal Reserve Bank of Kansas City Symposium Series

1978 World Agricultural Trade: The Potential for Growth (Kansas City)

1979 Western Water Resources: Coming Problems and the Policy President’s Alternatives (Denver, Colo.) message cont. 1980 Future Sources of Loanable Funds for Agricultural Banks (Kansas City)

1981 Modeling Agriculture for Policy Analysis in the 1980s (Vail, Colo.)

1982 Monetary Policy Issues in the 1980s (Jackson Hole, Wyo.)*

1983 Industrial Change and Public Policy

1984 Price Stability and Public Policy

1985 The U.S. Dollar—Recent Developments, Outlook and Policy Options

1985 Competing in the World Marketplace: The Challenge for American Agriculture (Kansas City)

1986 Debt, Financial Stability and Public Policy

1987 Restructuring the Financial System

1988 Financial Market Volatility Jackson Hole, Wyo., home to the Federal 1989 Reserve Bank of Kansas City’s economic Monetary Policy Issues in the 1990s symposium. 1990 Central Banking Issues in Emerging Market-Oriented Economies —continued from page 1 1991 Policy Implications of Trade and Currency Zones in the planning for nearly a year, the event was held only a month after the devalua- 1992 Policies for Long-Run Economic Growth tion of Thailand’s currency—the starting 1993 point of what would become known as the Changing Capital Markets: Implications for Monetary Policy Asian currency crisis. Against this back- 1994 Reducing Unemployment: Current Issues and Policy Options drop, the presentations at our 1997 event, including those by central bankers from 1995 Budget Deficits and Debt: Issues and Options Argentina, Japan and Sweden that focused 1996 on previous financial crises in each of those Achieving Price Stability nations, were especially significant. 1997 Maintaining Financial Stability in a Global Economy You can read the full proceedings from the 1997 symposium, as well as proceedings 1998 Income Inequality: Issues and Policy Options from each of our symposiums since 1995, on the Bank’s website: www.KansasCityFed.org. 1999 New Challenges for Monetary Policy We are currently converting the proceedings from symposiums prior to 1995 into an elec- 2000 Global Economic Integration: Opportunities and Challenges tronic format and will be making them avail- 2001 able on our website within the next few Economic Policy for the Information Economy months. Meanwhile, you can read about this 2002 year’s event in this issue of TEN. Rethinking Stabilization Policy

2003 Monetary Policy and Uncertainty: Adapting to a Changing Economy

2004 Global Demographic Change: Economic Impacts and Policy THOMAS M. HOENIG, PRESIDENT Challenges FEDERAL RESERVE BANK OF KANSAS CITY 2005 The Greenspan Era: Lessons for the Future

2 FALL 2005 . TEN *After 1982 symposium, all events held in Jackson Hole except the second 1985 event held in Kansas City.

LOOK ONLINE FOR THESE PUBLICATIONS FROM THE FEDERAL RESERVE BANK OF KANSAS CITY

ECONOMIC REVIEW www.KansasCityFed.org/EconomicReview A quarterly research publication focusing on economic issues of relevance to the Federal Reserve, including macroeconomics and monetary policy, financial markets, regional and international economics, and rural economic studies.

MAIN STREET ECONOMIST www.KansasCityFed.org/MSE A monthly publication from the Bank’s Center for the Study of Rural America focuses on issues facing rural America, its agricultural economy, and regional development.

FINANCIAL INDUSTRY PERSPECTIVES www.KansasCityFed.org/Perspectives An online periodical from the Supervision and Risk Management Division containing articles reporting on a variety of banking issues and topics.

PAYMENTS SYSTEM RESEARCH BRIEFING www.KansasCityFed.org/PSR-Briefing Produced three times annually, the publication focuses on a range of payments topics, including methods of payments, developments in payments networks, and various participants’ roles in the payments system.

www.KansasCityFed.org CLOSINGCOMMUNITY COLLEGES EMERGE AS ADVANTAGETHE FOR RURALGAP LEARNING

BY TONI LAPP, SENIOR WRITER onathan Fletchall of Pittsburg, Kan., is learning about motorcycle mechan- ics. Tyler Van Meter of Cheyenne, Okla., is learning about global position- ing system technology used in tractors. Benson Begay of Gallup, N.M., is J learning to advocate for victims in the Navajo Nation legal system. While these rural students are pursuing diverse careers, what they have in common is their choice of educational institution: community colleges.

At these institutions, students can earn president and economist with the Bank. “They associate in applied science degrees, which con- provide precisely the skill-based degrees and cer- fer very specific training tailored to an industry tifications that fit the demand of employers.” or avocation. Rural areas fight an incorrect perception This route to gainful employment is being that their residents are not as educated as touted by some as the key to giving rural areas a urbanites, says Henderson, senior economist. competitive edge again. Jason Henderson and On the contrary, rural residents are increasing Stephan Weiler of the Center for the Study of their educational attainment, and they’re doing Rural America at the Federal Reserve Bank of so by learning skills that are practical in today’s Kansas City report on the emerging trend in a job market. research paper, “Rural America’s New Path to “If you only look at bachelor degrees, you’re Workforce Skills,” summarized in the July 2005 not seeing the whole picture,” says Henderson. Main Street Economist. “Rural residents are increasingly ramping up “Community colleges play a big role in eco- their job skills with associate degrees.” nomic development,” says Weiler, assistant vice In fact, if one looks at the percentages of the population obtaining associate degrees, the THE HARLEY-DAVIDSON training program of Fort Scott figure is higher for people from rural areas than Community College is the only publicly offered program of its for their metro counterparts. kind, says its director, Steve Vergara. In 1995, percentages of rural and metro- politan residents holding associate degrees were roughly the same: 8 percent for nonmetro res- idents versus 7.8 percent for metro residents. By 2004, the percentage acquiring associate or technical degrees had shot up 40 percent for nonmetro residents, compared with 14 percent for metro residents. Perhaps one reason rural residents are dis- covering the value of two-year degrees is because that’s where the action is. In his research studying trends in U.S. job structure, Chad Wilkerson, a policy economist with the Federal Reserve Bank of Kansas City, says he was surprised to find that, according to

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ed in 1901. Then, the institu- tions were two-year liberal art schools that taught curriculum intended to transfer to bac- HARLEY-DAVIDSON calaureate degrees. Program director Steve The term “junior col- Vergara and second-year lege” fell out of favor as the col- student Patrick Dineen leges changed their missions to work on a motorcycle dur- ing class at Fort Scott Top Five Community College. Fields of Study at Community Colleges

1. APPLIED HEALTH 2.SKILLED TRADES-INDUSTRIAL 3. PUBLIC SERVICES 4. INFORMATION TECHNOLOGIES 5. BUSINESS

SOURCE: American Association of Community Colleges

focus more on local economies and community development. Today, most community colleges and technical schools offer a broad spectrum of aca- demic and training programs including remedial education, traditional courses for degree- the latest projections by the U.S. Labor seeking students on a budget and contract Department, jobs requiring an associate degree training customized for individual employers. or vocational award are expected to grow “Some of the evolution (of community slightly faster through 2012 than jobs requir- colleges), like evolution in general, is borne of ing a bachelor degree. environmental necessity,” says Bill Scaggs, “Having the right amount and right executive director of the Rural Community kind of education is important for success,” College Alliance in Meridian, Miss. “It’s diffi- says Wilkerson. “We generally give the mes- cult to operate a thriving institution in a sage that more education is always better, declining community.” but the current demands of employers are As technology becomes more sophisticat- causing us to rethink that message.” ed, high school graduates are no longer suffi- His research can be found in the second ciently prepared to enter the workforce, says quarter 2005 Economic Review. Stuart Rosenfeld of Regional Technical Strategies, Inc. (RTS), a nonprofit organiza- An educational evolution tion in Carrboro, N.C. that does policy Community colleges have evolved consid- research analysis into workforce and econom- erably since the first junior college was found- ic development. Community colleges are

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adept at teaching technical skills that employ- This is a concept that rural areas can also ers need, he says. employ, say the economists from the Center for RTS was founded with a mission to the Study of Rural America. improve the economic vitality of the rural areas “Community colleges can be vital cogs to that were losing their industry, says Rosenfeld. evolving clusters by ratcheting the existing skill Community colleges emerged as an underappre- base of a local area,” says Weiler. ciated asset. Some had created “advanced tech- nology centers” that worked with machine Think locally builders and software designers and offered John Deere began partnering with commu- training for small- and medium-sized businesses nity colleges in 1989, after dealerships—largely from expert faculty. in rural areas—gave corporate officers feedback Community colleges were well-positioned on the need for a quality workforce. for this kind of training because they are less “Our dealers were telling us they needed a research oriented and more accessible than uni- good resource for well-trained technicians,” says versities, says Rosenfeld. Kenneth Buell, manager of college partnerships One strategy RTS has employed in invig- for the tractor manufacturer. The first site for the orating areas is building business “clusters.” two-year program was Southeast Community The idea is that businesses, suppliers, profes- College in Milford, Neb. The program has been sional associations and educational institutions so successful that the company now sponsors congregate in one area, creating synergy. sites at 16 community colleges in the United Examples abound—Detroit and automobiles, States. John Deere provides tools, equipment North Carolina and furniture, Wichita and and instructor training to the schools. aerospace, to name a few. Technical training is compulsory for anyone wanting to work on the tractors, many of which are equipped with GPS technology, Windows- based computer programs and remote capabili- ties. But the company also wanted its technicians to have a well-rounded education, hence the partnership with community colleges. Students are required to complete coursework in technical writing, personal finance and communications. “We want our graduates to have a good career path,” says Buell. “It gives local people the chance to go back to their hometown and build Community colleges’ a career.” adaptable curriculum This is what appealed to Tyler Van Meter. The 21-year-old attended a four-year university The American Association of Community Colleges (AACC) tracks the populari- for a year with the goal of earning a bachelor’s ty of programs offered by its member institutions. Not surprisingly, health care, des- degree in industrial technology and someday ignated by the Bureau of Labor Statistics as having great growth potential, led the teaching a high school shop class. But he began field, says Sara McPhee, research associate. to rethink his plan after a summer job at a John Following health care, skilled trades programs were the next-hottest fields of Deere dealership close to home, where he study, she says. As such, these programs—in construction, agriculture and manu- learned about the program. The curriculum suit- facturing—were among the most commonly added to the offerings of community ed him, he says. colleges. But interestingly, these programs were also the most frequently discontin- “It’s more hands-on than anything,” he says. ued, according to AACC. How can this be? “I like working with my hands more than sitting “This demonstrates the way in which community colleges respond to the at a desk.” needs of local communities,” says McPhee. “As a manufacturing plant in one com- But most important: “This way I get to munity closes down, a manufacturing plant may be opening in another community. stay close to home.” The residents in the first community no longer need their community college to offer a manufacturing program, whereas the company opening the plant in the second community wants the local college to open a program as soon as possible.”

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Community colleges often are seen as a JOHN DEERE began partner- more welcoming environment for nontradi- ing with community colleges tional students. in 1989, after dealerships— Like Begay, Jonathan Fletchall is older than largely in rural areas—gave the traditional university student. Fletchall, 25, a corporate officers feedback former high school dropout who is married and on the need for a quality has two children, says he felt he was languishing workforce. in a job as a fork-lift operator when he found out about Harley-Davidson’s pilot program at Fort Scott Community College in Frontenac, Kan. He recently spent the summer interning at a dealership, where he finished the assembly of bikes out of the box. The experience confirmed that he was on the right career path, he says. “As my kids are getting older, I want to set a good example,” he explains. “Judging by the toys the mechanics here have, this will be a good job.” Fort Scott program director Steve Vergara says his program is the only publicly offered one of its kind. As corporate sponsor, Harley- Davidson provides diagnostic equipment, motorcycles, parts and accessories, training man- uals, and instructor training. The motorcycle giant was interested in a program that would give graduates “soft skills” for dealing with the increasingly affluent Harley owners, says Vergara. Graduates have the potential to follow a management career path with Harley-Davidson or work at dealerships. Some participants have aspirations to open repair shops back in their Targeting niches hometowns, so the program stresses entrepre- While community colleges excel by target- neurship, he says. ing the needs of the region, not all the programs This type of return on investment is what are technical in nature. community colleges are all about. Says The Tribal Court Advocate Program taught Henderson: “By helping local people invest in at the University of New Mexico at Gallup, an themselves, community colleges can be catalysts institution that includes two-year and four-year for rural regions seeking new economic opportu- programs, is emblematic of this. The associate nities in a globalizing economy.” degree program fills a very specialized need in T that region: graduates are qualified to represent clients in the nearby Navajo Nation court. FURTHER RESOURCES Benson Begay, 40, a paralegal who is in the FOR FURTHER READING ON THE ROLE OF COMMUNI- final semester of the program, says it fills a niche TY COLLEGES IN RURAL ECONOMIC DEVELOPMENT in the community. He speaks fluent Navajo and GO TO: will be able to use his education to do what he does best: “I like to help people, and these are www.KansasCityFed.org/TEN people who need help, who don’t understand laws and procedures (of the court),” he says. “I feel this COMMENTS/QUESTIONS are welcome is my way of giving back to the community.” and should be sent to [email protected].

FALL 2005 . TEN 7 BY TONI LAPP, SENIOR WRITER

IMPLICATIONS OF electronic payments and nonbank processing

ecent trends away from paper transactions toward electronic payments and nonbank processing of retail payments are brought about by the desire to increase Refficiency by exploiting economies of scale in payment pro- he letter from the retailer was cessing, argues Senior Economist Richard Sullivan in generic but polite, explaining his working paper “The Supervisory Framework that the company was investi- Surrounding Nonbank Participation in the U.S. Retail T gating the theft of customer Payments System: An Overview.” data that included credit card and debit There are many implications to the increased reliance card numbers. Midway through, the real on electronic payment networks. The scale of operations purpose of the correspondence emerged: and the interdependencies among elements of the network to notify the Designer Shoe Warehouse increase the potential for widespread disruptions. Sullivan’s paper describes the supervisory structure (DSW) customer that her account infor- over nonbank participants in the U.S. payments system mation was among the data stolen and reviews how policy tools such as standards setting, months before. disclosure, clarifying legal responsibilities, and supervi- The same letter was sent to 1.4 mil- sion can each play a role in improving control of pay- lion other customers who made ments system risk. purchases with charge cards or checks, including Federal Trade Commission TO ACCESS A PDF VERSION of the full document, pub- chairwoman Deborah Platt Majoras. lished by the Payments System Research Department of the Clearly, no one is exempt from the Federal Reserve Bank of Kansas City, go to threat of breached data. www.KansasCityFed.org/TEN.

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The question of how to moved beyond financial in- protect consumers’ privacy stitutions and even their has been around for years, vendors, as the DSW case il- long before a number of lustrates. The shortcomings breaches this year resulted in of GLBA have been clear in millions of consumers’ per- many of these cases; the leg- sonal data being exposed. An insider’s islation, as currently written, When the issue came only applies to financial in- up in Congress, U.S. finan- view of stitutions that deal directly cial institutions favored an security with consumers. “opt-out” system that was proposals “What’s troubling me is a put into law by the lot of the data that’s a target Joshua Peirez, senior vice president and associate Gramm-Leach-Bliley Act in general counsel at MasterCard International, was for hackers is your account 1999. In other words, con- at the Federal Reserve Bank of Kansas City recent- information; that’s where the sumers who don’t want ly to address officials involved in supervision, money is. And more of that their personal information research and operations at the Bank. Peirez, who information is in a more to be shared must opt out has testified before Congress on the issue, spoke readily accessible form in fi- in writing, a scheme that fa- largely about risk in the payments system in the nancial and nonfinancial wake of recent data breaches. vors businesses who want to institutions as well as at re- sell their customers’ infor- WHAT IS HIS VIEW OF PROPOSED LEGISLATION? tailers,” said Sullivan. mation. The law, known as THE PUNISHMENT NEEDS TO MATCH THE CRIME. GLBA, also established that “It is critical that criminal penalties are increased The weakest link financial institutions have a to fit the magnitude of these crimes and that the Identity fraud is actual- responsibility to protect crimes themselves are easy for law enforcement ly on the decline. A 2005 “nonpublic” information and prosecutors to prove,” says Peirez. study by a credit industry such as account numbers THE GRAMM-LEACH-BLILEY ACT, with its require- consultant found that in a and Social Security numbers. ments for storing sensitive data, should be year’s time, 9.3 million As a result, some ob- expanded beyond defined “financial institutions,” American adults were vic- servers think GLBA has says Peirez. Any entity-retailers, marketers and tims of identity fraud, a become a double-edged payments processor that stores, transmits or uses 7.9 percent drop from a sensitive consumer data also should have clear sword. Financial institu- obligations to safeguard this data. study in 2003. tions asked for freedom to However, the mean cost use the information, and HAVING A UNIFORM NOTIFICATION LAW that pro- of each theft increased 12 vides consumers with notice both when they rea- now they have to bear the sonably need it and in a way that they can make percent. Thieves are stealing responsibility to protect it. use of the information makes sense, says Peirez. more from their victims. The According to a recent It is important to work to find the right balance so average out-of-pocket cost to working paper by Richard that consumers are not overnotified or undernoti- the victim was $652, and the Sullivan, senior economist fied. It isn’t easy to accomplish, but it is impor- time spent to resolve ensuing in the Payments System tant, says Peirez. problems averaged 28 hours. Research Department at Clearly, identity fraud is the Federal Reserve Bank of Kansas City, data costly, consuming money and time. breaches are examples of operational risk in Thieves are going where the access is: the payments. Sullivan’s paper discusses risk con- Internet. While identity theft in general is de- trol in the U.S. retail payments system in light clining, attacks on Internet users appear to be of the proliferation of electronic payments. increasing, based on a seven-year study by the So how well are companies doing? Financial Crimes Enforcement Network. In the first half of 2005, 50 million ac- Reports of suspicious activity tied to Internet counts had been breached in a variety of or online banking were on the rise by 2002. incidents. More disturbing is that the issue has A lot of publicity has been given to the

FALL 2005 . TEN 9

Primary Methods of Identity Theft (From Known-Cause Cases)

Lost, stolen wallet, checkbook or credit card 28.8% Friends/acquaintances/relatives with access to it 11.4% Corrupt employee who had access to the info 8.7% Offline transaction 8.7% Stolen paper mail/fraudulent change of address 8.0% Computer spyware 5.2% Taken from the garbage 2.6% Online transactions 2.5% Computer viruses/hackers 2.2% SOURCE: JAVELIN STRATEGY AND RESEARCH Phishing 1.7% 0% 5% 10% 15% 20% 25% 30%

risks posed by electronic payment methods; processor, which acts as an intermediary be- however, most thieves obtained personal infor- tween merchants and credit card issuers like mation using “offline” methods—billfolds MasterCard and Visa. were lost or stolen, acquaintances or family What of the protections mandated by members abused their access or mailboxes were GLBA? The law only applies to financial insti- compromised. tutions providing services to consumers. That said, a number of means for infor- Because of the need for advanced technol- mation to fall into the wrong hands exists in ogy in the era of electronics payments

the world of electronic payments. The chart processing, outsourcers such as CardSystems

above shows the most common methods crim- have sprung up in recent years. The danger is inals use to access sensitive information. that outsourcers add another step in the move- “ “ We have little systematic evidence on whether data breaches are occurring more or less in bank or nonbank organizations. With the growing complexity of technolo- ment of money, another place in a network for gy and the increasing innovations in payment people to tap into. methods, it’s a reasonable public policy ques- As the number of outsourcers increases, so tion to ask what rules regulators are creating to will the risk to the payments system. address changing security risks. So who’s watching for weak links? When national media reported earlier this In his paper, Sullivan describes the su- year that 40 million credit cards stored by a pervisory structure over providers of technology service provider had been technology services to banks, which is ad- breached, it shed light on the potential for ministered by a little-known agency named fraud when a customer makes a purchase with the Federal Financial Institutions a charge card. Examination Council, or FFIEC. FFIEC After all, such purchases involve a comprises members of all the federal agencies labyrinth of steps during which a weak link can responsible for regulation and supervision of be exploited by a thief. U.S. depository institutions, including the The company responsible for the breach, Federal Reserve System. The FFIEC assesses CardSystems Solutions Inc., is a payment risk in providers of technology services to

10 FALL 2005 . TEN Modus Operandi banks and coordinates examinations of the riskiest providers. There are a number of methods Typically, the team that reviews the firm the criminally minded can employ ONLINE comprises examiners from member agencies, to do harm: such as the Federal Reserve, the Federal Deposit SPYWARE: These are programs that, when installed on a Insurance Corporation and the Office of computer, can change settings, display advertising, track Comptroller of the Currency. This ensures that 1 Internet behavior and report information back to a central the firm only undergoes one exam, but that all database. Spyware may be installed unintentionally by agencies are kept apprised of developments. This users, and can be very difficult to remove. This type of program reduces regulatory burden on a firm breach was responsible for 5.2 percent of cases of identity and improves supervisory efficiency. theft, the single most common online breach. Nonbank providers of payment process- ing services are part of the supervision PHISHING: In this type of attack, an e-mail that appears to program. The FFIEC risk assessment would 2 come from a legitimate company (for instance, eBay) is sent likely place the largest payments processors in to recipients, who are asked to go to a site to update the supervision program, but due to limited records and verify username and password. The site is actu- information, resources and jurisdiction, only ally a place to collect that information and steal identities, 125 payment processors are supervised, money, records and more. Phishing was cited in a recent Sullivan notes in his paper. study in 1.7 percent of identity theft cases. CardSystems Solutions was one of about 500 payments processors; clearly many of these HACKING: Many types of malfeasance—computer firms go unsupervised. Whether this poses 3 worms, Trojan horses and more—fall under this moniker. much risk to payments is uncertain. Hackers, a term used to describe criminals who subvert “We have little systematic evidence on computer security without authorization, were responsible whether data breaches are occurring more or for about 2.5 percent of known cases of identity theft. less in bank or nonbank organizations or CardSystems Solutions was victim to hacking. among supervised or unsupervised technology service providers,” says Sullivan. ed in the United States until June 2005. Public policy Officials have declined to say when the FBI Who should bear the costs of security was notified. breaches? When credit cards are used fraudu- What frustrates researchers trying to study lently for online purchases, merchants pay for the issue is the lack of cold, hard data. Out of the fraud, not the card issuer. Some argue that millions of data exposures occurring this year, this gives little incentive for card issuers to im- it is unknown how many resulted in actual plement anti-fraud measures. Similarly, losses to individuals. cardholders may not have incentive to exercise The letter to the DSW customer intimat- vigilance when they are protected by loss limits. ed as much: “We cannot know if your credit To protect the payments system, analysts card or debit card will or will not be used by have proposed legal reform and regulation to the thieves to commit fraud,” it said. rationalize liability and responsibility for risk Sullivan says getting better information on in contracting relationships for payment pro- these crimes should be a priority: “As a society we cessing. Lawmakers are considering more will have to deal with these things as they come severe consequences for mishandling sensi- along. You can’t fix security problems until you tive information. know what they are and how bad they are.” It is likely that public disclosure will be ad- T dressed by future legislation. The CardSystems Solutions breach was discovered by Australian COMMENTS/QUESTIONS are welcome bank officials in late 2004, yet it wasn’t report- and should be sent to [email protected].

FALL 2005 . TEN 11

‘

‘If you build it, they will come’ Entrepreneurship and community development

BY TONI LAPP, SENIOR WRITER

t’s a warm summer evening in Projects plan—or MAPs, an acronym Oklahoma City, and Mark that most residents already know. Carmouche, a flamboyant wa- “We have no natural landmarks. No I ter taxi driver, is telling his Rocky Mountains, no Atlantic Ocean boatful of passengers about the down- and no Pacific Ocean. But this is town river walk they are traversing. Oklahoma City, and if you build it, they ‘ “This used to be a slum in here, a sal- will come,” he declares. “It must be vage operation,” the silver-haired captain working; Brazil’s here after all.” says as he gestures to the buildings on Such optimism is typical in both sides of the concrete banks. “But Oklahoma City’s Bricktown neighbor- Oklahoma City got rid of all that and hood. It is a model that other built this canal. Oklahoma City is a communities could learn from, says an leader in downtown renewal.” economist at the Federal Reserve Bank of He queries to see what out-of-state Kansas City. visitors are on his boat and enthusiasti- “Traditionally, communities have cally responds, “Yee haw,” when he learns sought after large firms in developing there is a group of five from Brazil. their local economies, but research shows He goes on to tell the passengers that this is not likely to be a successful about his city’s Metropolitan Area policy,” says Kelly Edmiston of the

FALL 2005 . TEN 13 Community Affairs Department. “We have found that large firms ultimately do not bring as many jobs and benefits as expected when they relocate or open a new location. You have to consider what might have happened in the absence of the firm. Moreover, aggressive re- cruitment policies often set off bidding wars that leave everyone worse off. A better option is to create an environment conducive to entre- preneurship and home-grow your own economic success.” to tour downtown Indianapolis to see what it Edmiston has written recently about his had that Oklahoma City didn’t. research on community development strategies “There were people downtown, restau- in a paper titled “The Role of Small Businesses rants, hotels—lots of activity, whereas in Economic Development.” An entertain- Oklahoma City was struggling,” he said. ment district such as Bricktown offers just such A seed of an idea was planted: Rather than an example of an environment conducive to wait for a company to come to the rescue of its entrepreneurs. The positive effect is felt in blighted downtown, Oklahoma City would re- terms of both job creation and tax impact—by build itself. attracting a number of small businesses and “We rolled the dice in an up or down pro- creating a vibrant community in which people posal,” says Norick. “It was a gamble, but our want to live and work. people supported it. Every church group, neigh- A twist of fate gave impetus to Oklahoma borhood group, civic group got behind it. The City’s Bricktown District. In 1991, the city, then thought was, ‘We’re doing it for our kids. We’re reeling from the 1980s oil bust, had put togeth- not doing it for jobs, but for ourselves.’” er a financial package in a bid for a United In 1993, voters approved a sales tax increase Airlines maintenance facility. City leaders had that paid to build a baseball park, canal and per- lobbied residents to pass a 33-month, one-cent forming arts center, upgrade the convention sales tax to offer incentives to the airline. center and more—nine projects in all. Many Needless to say, officials were disappointed more projects that followed were private. when they learned that the airline would build “My plan was to put as much as we were its facility in Indianapolis instead. going to spend on the aircraft plant into the Then-Mayor Ron Norick was motivated downtown area,” says Norick. “To get hotels

14 FALL 2005 . TEN To be fair, Oklahoma City wasn’t starting from scratch. There was already a convention center downtown. Nearby, there were a lot of vacant brick buildings already owned by the city. Much thought was put into the projects MAPs would undertake. The SBC Bricktown Ballpark was the first project. “Naturally, restaurants and clubs fol- lowed, because they’re going to go where the people are,” says Norick. The theory that private investment follows public investment is proven time and again throughout the area, says Frank Sims, execu- tive director of the Bricktown Association. Sims counts off on his fingers some of the oth- er public projects that have figured into the

and restaurants, we needed lots of activities in one area.”

Mapping a future Jim Cowan was one of the few entrepre- neurs who gambled on Bricktown before anyone else did. Many people scoffed at his business plan for Bricktown Brewery, a micro- taxpayers’$350 million contribution: the Ford brewery and restaurant in the warehouse Center Arena, a reconstruction of the Civic district, he said. Center Music Hall and a public library. But get “This wasn’t a proven location, but there him to tally the litany of private investments was excitement about what there could be,” he that have followed and he runs out of fingers: said. The hardwood floors, brick walls, open two new hotels, an apartment complex, a Bass ductwork and exposed pipes of the turn-of- Pro Shops sporting goods store and country the-century building—once a candy factory— music star Toby Keith’s restaurant and night- provided the atmosphere that Cowan wanted club, just to name a few. for his business. He opened in October 1992, The challenge as Bricktown continues to the year before MAPs went to voters. grow is to improve the mix of retail and resi- Business was lackluster, and rumblings dential to the abundance of nightclubs and about improving the area occurred in fits and restaurants, says Sims. starts. MAPs jump-started the movement. There is a sense that Bricktown is reaching “It didn’t happen fast enough for some of critical mass. us,” says Cowan. One of the newest tenants is Nonna’s, a

FALL 2005 . TEN 15

BRICKTOWN A lesson in community development

ricktown might offer an example for other prospective firm is indifferent to locating in either communities interested in fostering jobs jurisdiction, says Edmiston. Wherever it locates, it Band revenue. will create new jobs and income, but it will also The entertainment district came about in the generate additional costs to the region, which aftermath of disappointment over the lost United must provide roads, sewers and public services Airlines contract. The money that was used to such as schools and police. build Bricktown would not have been available “Now consider that one of the regions offers to had the city instead used the money to create abate the locating firm’s property taxes, and the financial incentives for the airline, says Ron other region follows suit to stay competitive. The two Norick, the former mayor. regions are again on a level playing field. “Neither region has gained an advantage by “Aggressive courting of its aggressive recruiting, but the winning region large firms can distort will now be faced with increased costs but no rational behavior, caus- property taxes to offset them,” Edmiston writes in ing a waste of economic his paper. resources.” Like it or not, a relocating business is going to —Kelly Edmiston increase costs for the new area. Other businesses that don’t receive tax abatements will be left pay- With Bricktown, Oklahoma City has created an ing the bill, says Edmiston. environment conducive to small business growth, T says Federal Reserve economist Kelly Edmiston. “Bricktown is likely to be self-sustaining, while a manufacturing plant in the global economy won’t be,” he said. Ironically, the winner of the United Airlines contract, Indianapolis, did not realize a great boon from the maintenance facility. The jobs that were created did not reach the number promised by the airline, which filed for bankruptcy in 2002. Yet, the bidding war for the maintenance facili- ty is a strategy frequently pursued by communities. “Aggressive courting of large firms can distort rational behavior, causing a waste of economic resources,” says Edmiston in his paper, “The Role of Small Businesses in Economic Development.” Take the case of two competing regions that are otherwise on a level playing field, so that a

16 FALL 2005 . TEN restaurant and gift store owned by Avis cus largely on keeping down expenses such as Scaramucci. She says initially she was skeptical taxes, land and labor. This focus has prompted about the MAPs plan. them to move in large numbers, first to the “I was going to vote ‘no,’” says South and then overseas, to contain costs. Scaramucci. “But MAPs passed, and lo and be- “Now our economy is transitioning into hold before our very eyes, things started something better,” says Edmiston. “We don’t happening. First the ballpark, then the library need to, nor should we try to, keep these busi- and museum. The building began. nesses from moving.” “I got so excited, I began coming down Job growth is now in high-tech, high- here and poking around. The buildings just paying industries. With these employers, the caught my imagination.” concern is more on finding qualified work- She eventually purchased a building near ers, he says.

the canal and relocated her establishment “Anymore, businesses with high-skill,

from the south side of the city. high-paying jobs are going to relocate where The decision was easy, she says. smart, creative people want to live,” he says. “ “ Businesses with high-skill, high-paying jobs are going to relocate where smart, creative people want to live. “How many times in your lifetime do you This being the case, then Dell’s move can get to witness a renaissance in your own city?” be viewed as a vote of confidence for But she is not alone. Other entrepreneurs Oklahoma City. are opening businesses in what she describes as T a “conglomeration of people and opportunity.” “There are so many people down here, dif- ferent people doing different things, and we come together as a neighborhood.”

Quality of life “When I think about Oklahoma City and Bricktown, the thing that impresses me is that the goal here was not to lure companies, but to create a nice place to live,” says Edmiston. The indirect benefit of improving the quality of life was to make the city more entic- ing for business. This was demonstrated recently. In 2004, Dell opened a customer service center in Oklahoma City, a move that never would have happened before the down- FURTHER RESOURCES town redevelopment, says Norick. Events such as this reflect a shift in strate- THE ROLE OF SMALL BUSINESSES IN ECONOMIC gy in community development. Once upon a DEVELOPMENT time, communities tried to develop a niche in- dustry for themselves. Edmiston envisions www.KansasCityFed.org/TEN something more organic happening—an envi- ronment that attracts bright people who bring their own niche ideas. Traditionally, U.S. job growth is centered COMMENTS/QUESTIONS are welcome on manufacturing, he notes. Manufacturers fo- and should be sent to [email protected].

FALL 2005 . TEN 17

JACKSON HOLE, WYO.—

t was a defining event in the histo- ry of Alan Greenspan’s years as Chairman of the Federal Reserve I System, said his peer in the world of central banking. Mervyn King, governor of the Bank of England, had been invited to speak at the Federal Reserve Bank of Kansas City’s annu- al economic symposium, a storied event among economists, academics and central bankers. The Bank’s 29th annual symposium was unique in that it would be Greenspan’s last at the helm of the Federal Reserve System. Speakers were asked to examine Greenspan’s Chairmanship as a period of time, in a conference titled “The Greenspan Era: Lessons for the Future.” Of all the economic shocks that occurred on Greenspan’s watch—the stock market collapse of 1987, international financial crises of the 1990s, the dot-com bubble that burst in 2000, the terror attacks of Sept. 11, 2001—one salient example of the Greenspan Fed’s ability to steer the U.S. economy was much more subtle. In the mid 1990s, the U.S. economy ex- perienced a productivity acceleration. The trend wasn’t proved by data until the late 1990s, but Greenspan was taking note of the changing conditions as early as 1995. “Chairman Greenspan did not wait until 1998 to conclude that the underlying rate of productivity growth might be increasing,” said King. “The key reason was that he talked with and listened to people who work in business.” Given the economic conditions of the day, conventional wisdom would have led any other economist to support belt-tightening in the form of higher interest rates, especially when the unemployment rate dipped, a risk factor for inflation. Greenspan had to con- vince the Federal Open Market Committee, which he chaired, not to raise rates.

18 FALL 2005 . TEN

PHOTO BY SCOTT INDERMAUR

“If they had, we might not have gotten the participants pondered his extraordinary career growth that we got,” noted Craig Hakkio, sen- and what lessons could be learned from his ior vice president and director of research for tenure. Greenspan, the second-longest serving the Federal Reserve Bank of Kansas City. Federal Reserve Chairman, is due to step down The United States’ underlying rate of pro- at the end of January. ductivity growth increased from about 1.5 Perhaps the guest list this year reflected the percent to about 2.5 percent in the mid and sense of history surrounding the event. In ad- late ‘90s. Such an increase in productivity dition to King, participants included growth means an increase in the growth rate of Xiaochuan Zhou, governor of China’s central output per worker, thereby boosting a nation’s bank, attending for the first time; Jean-Claude standard of living. Trichet, president of the European Central Bank, who recalled his experiences with Symposium Greenspan at G7 meetings; and Robert Rubin, Each year, the Federal Reserve Bank of former Treasury secretary, who discussed his Kansas City invites a select group of experts from interactions with the Chairman, particularly around the globe to discuss economic issues at its during the global financial crises that marked August symposium in the Grand Tetons. Topics the 1990s. are selected with an eye on relevance to current Greenspan’s remarks at the meeting were economic policy issues; discussions follow in a general; he recalled his 18 years at the Federal free-flowing exchange of ideas. Reserve, and discussed various indicators used This year’s symposium was marked by to guide monetary policy. The discussion led to buzz that was beginning to build around who his philosophy of risk management—that is, would succeed Greenspan as Chairman, and assessing the many risks to the economy and the consequences of each and then taking pre- cautions against those most likely to create significant damage. Participants discussed the ramifications of this policy, including the Federal Reserve’s move in 2003 to cut the federal funds rate to 1 percent—a historically low level—to pre- vent the unlikely but potentially dangerous risk of deflation.

Eyes on the price Alluding to the housing boom, Greenspan commented on the recent rise in asset prices and cautioned that many investors had grown complacent in their expectations of continued price appreciation and in requiring less com- pensation for taking on risk: “History has not PHOT O BY MARK WILSON/GETTY IMAGES dealt kindly with the aftermath of protracted periods of low risk premiums,” he warned. AS FEDERAL RESERVE CHAIRMAN, Alan Greenspan attends It was an innocuous comment in context, Group of Seven, or G7, meetings along with other world finan- but one that was seized on by media and re- cial leaders, including European Central Bank President Jean- peated ominously on news programs, some of Claude Trichet (left) and Bank of England Governor Mervyn King (right). Both men attended the economic symposium in Jackson which were broadcasting from the hotel’s lawn. Hole, Wyo., where lessons from Greenspan’s tenure was the The Federal Reserve, after all, has traditionally theme of the conference. focused on growth, inflation and employment numbers. Speculation that the central bank

20 FALL 2005 . TEN productivity growth well before the data enter into the decisions of households and firms. proved it. In other words, a healthy economic envi- ronment is one in which inflation is such a ‘Irrational exuberance’ non-issue that people don’t talk about it, said Symposium participants noted that one of King. Perhaps this can be applied to a num- the biggest financial shocks of contemporary ber of issues—taxes or property rights for times—the stock market bubble of the late instance, he said. 1990s—occurred during Greenspan’s watch. Remember the “irrational exuberance” speech? Future challenges This leads to a discussion of one of Whoever becomes the next Chairman of Greenspan’s philosophies—that it is easier to the Federal Reserve System will have to deal “mop up” after bubbles than it is to try to pre- with many issues—the effects and risks posed vent them from forming in the first place. by technological innovation, and the aging of Some would have suggested the Federal the U.S. workforce, to name a couple. Reserve should have raised interest rates to cool down the economy as asset prices escalated, particularly during the stock market boom of the late 1990s. Instead Greenspan adopted a policy of cutting interest rates in the aftermath. Presumably, this philosophy holds, whether the asset in ques- tion is stocks or housing. Which leads to another lesson that King says can be learned from Greenspan. That is, a consistent pol- icy framework will sustain a market economy over the long term. His counterpart from the European Central Bank agreed. “A well-designed institutional PHOTO BY KARIN COOPER/GETTY IMAGES framework, which undisputedly assigns the central bank the pri- FEDERAL RESERVE CHAIRMAN Alan Greenspan regularly testifies before lawmak- mary objective of price stability, ers on the state of the economy. Here, he presents a July 1998 midyear report on and the adoption of a clear mone- monetary policy to the Senate Committee on Banking, Housing and Urban Affairs. tary policy strategy, which quantitatively defines price stabili- ty and does not pretend to fine-tune directly But perhaps the repercussions of the trade the business cycle, can make the latter type of imbalance loom largest. Never before has a coun- policy activism unnecessary in many circum- try of the United States’ size and advancement stances,” said European Central Bank run such a large current account deficit—the dif- President, Jean-Claude Trichet, echoing that ference between what a country spends on ever-important concept of price stability. imports and what it spends on exports. The U.S. What constitutes price stability? Former current account has moved from being nearly Chairman Paul Volcker defined, and balanced in the early 1990s to posting a record Greenspan embraced, price stability as an en- deficit of over $600 billion in early 2005. vironment in which inflation is so low and This topic received much discussion at the stable over time that it does not materially economic symposium. In the view of many

FALL 2005 . TEN 23

GREENSPAN TIMELINE Key events during the Chairman’s tenure AUGUST 1987 Greenspan sworn in as Chairman of Federal Reserve System. his seat behind the Chairman’s desk Dow Industrials at a record: 2,747. and opens the top drawer in search OCTOBER 1987 of Alan Greenspan’s magic formula, he will be sorely disappointed,” said Black Monday stock market crash—22.6 percent loss is the steepest dive ever in percentage terms. Alan Blinder, who was appointed by President Bill Clinton to serve as 1989 Federal Reserve Vice Chairman un- Savings and Loan crisis of 1980s culminated in cleanup plan by der Greenspan in the 1990s and is government estimated to have cost from $500 billion to $1 trillion. now an economics professor at Princeton University. JULY 1990 - MARCH 1991—RECESSION Nevertheless, King, governor of the Bank of England, cited three lessons 1995 he learned from his counterpart: Productivity boom. Greenspan identified this phenomenon, even “The key is to recognize that though most economists, basing their assessments strictly on economics tells you how to think, statistical data, disagreed. not what to think,” he began. 1994-95 Accordingly, policymakers should Mexican peso crisis. The Fed, under Greenspan’s direction, be skeptical that any economic mod- provided standby liquidity and encouraged corrective action el accurately describes how the economy responds to policy. Many on part of others. observers say Greenspan’s ability to DECEMBER 1996 not be constrained by specific models Greenspan speech questions whether “irrational exuberance” or theories made his term successful. has unduly escalated asset values. “Monetary policy under Greenspan 1997-98 has been remarkably flexible and Asian and Brazilian financial crises; adaptable to changing circum- Greenspan’s Fed increased liquidity. stances—a point he has frequently 1998 emphasized,” said Blinder. Russia defaults on debt. Fed lowers rates. Responding to the 1998 world financial crisis by cutting interest MARCH 1999 rates three times “was not in the Dow Industrials reaches 10,000 milestone. books,” Blinder said. J ANUARY 2000 “That was very much ad hoc. Dow Industrials peaks at all-time high: 11,722. One could argue that it was not ap- FEBRUARY 2000 propriate for the U.S. (to cut interest U.S. expansion reaches 107th month—the longest on record. rates). This could never have been SPRING 2000 prescribed by a rule,” said Blinder, Dot-com bubble bursts. noting that members of the FOMC were urging Greenspan to tighten. The next lesson that King cited MARC H - NO VEMBER 2001—RECESSION related to Greenspan’s information gathering. While many economists 2001 are content to rely on econometric Terrorism attacks; Fed provided liquidity, guaranteed discount models and official data, it is impor- window would be open. tant to use information from a range JUNE 2003 of sources. Tapping business leaders Fed funds rate cut to 1 percent in response to deflation risk. for their observations is essential, SEPTEMBER 2005 said King, referring to Greenspan’s FOMC raises Fed funds rate to 3.75 percent with an 11th ability to detect the upturn in trend consecutive quarter-point increase.

22 FALL 2005 . TEN

would target asset prices was enough to mo- mentarily move markets. Why should the central bank concern it- self with asset prices? Because the phenomenon of a bubble forming and then bursting creates and destroys wealth, distorting resource allocation. In essence, this affects the Federal Reserve’s target variables—inflation and output. The Federal Reserve is interested in asset prices in that they are another piece of information that indicates the health of the economy, measured by growth and inflation. Greenspan alluded to as much at the symposium. “The configuration of asset prices is al- ready an integral part of our evaluation of the large array of forces that influence financial sta- bility and economic growth,” he said. However, this does not mean the Federal Reserve will attempt to pre-empt unsustain- able increases in asset prices, largely because it is difficult to discern a bubble until the bubble has burst. Not yet, anyway. “I certainly do not rule out that future work could improve our understanding of asset price behavior, and with it, the conduct of monetary policy,” said Greenspan.

Data, details and discretion PHOTO BY SCOTT OLSON/GETTY IMAGES Greenspan, a former jazz musician, was a known quantity when President Ronald Reagan FINANCIAL MARKETS MOVE in response to events of the day, appointed him Chairman of the Federal Reserve prompting traders such as these in Chicago to listen to Federal in 1987. He had previously served as Chairman Reserve Chairman Alan Greenspan for any hint that the central bank may raise interest rates. of the Council of Economic Advisers for the Ford administration and had demonstrated a mastery of data and numbers. To accomplish this, he watched an array of Some have likened leading the Federal economic statistics such as employment, in- Reserve to driving a car. The governing body ventories, orders and shipments. makes decisions regarding inflation and the fed- Given the weighty challenges the next eral funds rate target and exerts control to speed Chairman will face, there is keen interest in up or slow down the economy as appropriate. learning the keys to the Greenspan Fed’s success. During the Greenspan era, the nation experienced only two mild recessions. It’s Monetary Policy 101 been a relatively smooth ride; during his Is monetary policy a strategy involving tenure, inflation fell gradually from roughly statistics and analysis, or intuition and hu- 4 percent to 2 percent—achieving the man instinct? Or both? Federal Reserve’s mission of price stability. “When the next leader of the Fed takes

FALL 2005 . TEN 21 Toward a more transparent Federal Reserve

BY TONI LAPP, SENIOR WRITER

ne significant change to come out of Alan Columbia University, presented a paper titled “Central Greenspan’s Federal Reserve was a move- Bank Communication and Policy Effectiveness,” at the Oment to a more open organization. symposium. He says that what the FOMC has done to During Greenspan’s tenure, the Federal Open date is not enough. Market Committee—or FOMC—began releasing inter- “The public’s understanding, not only of what the est-rate decisions immediately following its meetings. The central bank is currently doing, but of what it can be ex- first such communication was to announce a rate hike in pected to do in the future, is critical for the effectiveness February 1994. Concerned that the increase—the first of policy,” he said. such hike in 17 months—would shake up markets, There appeared to be momentum to the idea of Greenspan told the FOMC they needed to “make cer- more open communication. Other speakers also voiced tain that there is no ambiguity about our move.” support for the idea. Before then, such decisions weren’t announced for at "Long-term interest rates matter more than the feder- least six weeks. Fed watchers on Wall Street had to study al funds rate, and expectations are better managed if the measures of the money supply to determine if any tighten- market can better anticipate what the central bank will ing or easing had occurred as a result of the meetings. do in the future," said Alan Blinder, former vice chairman. Greenspan acknowledged the changing approach Woodford suggested that having inflation targets in communications at the symposium. would enable central banks to better explain interest rate “We have moved toward greater transparency at a decisions, he said. measured pace, in part because we were concerned about potential feedback on the policy process and “The public’s understanding, not about being misinterpreted, as indeed we were from time only of what the central bank is to time,” he said. currently doing, but of what it can The movement toward greater transparency contin- ued in May 1999, when the Federal Reserve began to be expected to do in the future, is issue a statement after every FOMC meeting whether or critical for the effectiveness of not the funds rate had been changed. policy.” In 2003, the Fed ventured further. In May, the —Michael Woodford FOMC became concerned about the potential risk of deflation, and the committee’s postmeeting press release While a number of countries’ central banks set infla- began to include statements about this outlook. In June tion targets, the United States’ Federal Reserve has the FOMC lowered the funds rate to a decades-low 1 stopped short of announcing an explicit numerical infla- percent and by August it began to make statements tion objective. about the future funds rate operating target. This was a However, a future chairman may believe that publi- significant change; the Federal Reserve went from mak- cizing inflation targets could be a useful communication ing forward-looking statements about economic outlook tool and policy strategy. to making forward-looking statements about possible fu- What does Greenspan think of such an approach? ture policy actions. He touched on the topic at the symposium. Some economists at the symposium suggested the “To date, we have chosen not to formulate explicit Federal Reserve should consider further steps toward inflation targets, in part, out of concern that they could in- openness. hibit effective pursuit of our goal.” Michael Woodford, professor of economics at T

24 FALL 2005 . TEN participants, erasing the trade deficit will be Whether the decline will be orderly or painful. Large current account deficits are fi- abrupt will depend on maintaining, if not in- nanced through the inflow of capital from creasing, the flexibility of economic foreign investors purchasing U.S. securities. If institutions in the United States and abroad, the flow of capital were to stop suddenly, the dol- he said. lar could depreciate and inflationary pressures might build. This could lead the Federal Reserve Farewell, Chairman to raise short-term interest rates which, in turn, About 150 participants attended the 2005 could slow economic growth in the United symposium, and while some proclaimed the States and possibly the rest of the world. guest of honor to be possibly the greatest cen- While there are no modern historical tral banker ever, others stopped short of such precedents for a country as large as the United heroic terms. In the end, only the passing of States running very large and persistent current years will determine Greenspan’s legacy. account deficits, there are numerous examples Over the course of two days, Greenspan

of current account reversals among smaller sat near the back of the conference hall and

countries in both the industrial and developing took it all in. Although he might have raised world. And the experience of these countries his profile by injecting himself into the discus- “ “ Monetary policy under Greenspan has been remarkably flexible and adaptable to changing circumstances. does not bode well for the United States. sions that followed the presentations, he Previous episodes of current account rebalanc- quietly observed. ing in both industrial and developing countries Except for the occasional autograph seeker have been associated with a depreciation of the hanging around outside the meeting hall, he exchange rate and a temporary reduction in attended the symposium with little fanfare, ad- real GDP growth. Effects on inflation and in- dressing the participants at the beginning and terest rates vary depending on the size of the then at the end. His concluding remarks were country and whether it is industrialized, noted met with a standing ovation, as close as you get Sebastian Edwards, professor at the University to hero worship in a crowd of economists, aca- of California-Los Angeles. demics and central bankers. A reduction in the trade deficit will in- T clude simultaneous adjustments in savings and investment in the United States and the rest of the world, along with changes in ex- change rates. In addition, to ensure that the adjustment is gradual, most participants felt that policymakers should resist protectionist trade measures and work toward further FURTHER RESOURCES trade liberalization. Greenspan himself had some thoughts THE GREENSPAN ERA: LESSONS FOR THE FUTURE about the current account deficit, and noted Papers presented during the Federal Reserve Bank of Kansas City’s annual economic symposium in Jackson Hole, Wyo. that the correlation between increases in home equity extraction and the current ac- www.KansasCityFed.org/TEN count deficit suggests that the end of the housing boom “could induce a significant rise in the personal saving rate, a decline in imports, and a corresponding improvement COMMENTS/QUESTIONS are welcome in the current account deficit.” and should be sent to [email protected].

FALL 2005 . TEN 25

FOR THE FULL TEXT of Ken Spong and Jim Harvey’s research, “Home Financing for Low- and Moderate- Income Borrowers: What are the Trends in Denver?” go to: www.KansasCityFed.org/TEN BY KEN SPONG, SENIOR POLICY ECONOMIST AND JIM HARVEY, POLICY ECONOMIST

ver the last decade, dramatic changes have taken place in home lending and mortgage markets. These changes have been spurred on by a number of factors, including a strong economy, O rapid technological innovation and increased public and regula- tory scrutiny of fair lending laws and affordable housing programs. An outgrowth of all of these changes is a rapid increase in the volume of home lending across much of the United States.

This trend has been particularly evident and 2001, thus giving many lower-income bor- in the Denver metropolitan area. The dollar rowers a solid employment record and the volume of loans extended for home purchases willingness to undertake the long-term financial in Denver increased by nearly four-fold be- commitment required to purchase a home. tween 1992 and 2002, and housing prices Declining interest rates are another part of the appreciated at twice the annual nationwide relatively bright economic picture. The average rate during the 1990s. interest rate on new 30-year, fixed-rate mort- These numbers point to a significant in- gages fell from 10.13 percent in 1990 to 6.54 crease in home lending and homeownership— percent in 2002 and has mostly stayed below 6.0 71 percent of Denver households now own their percent since then. homes compared to less than 66 percent in Another set of factors, technological innova- 1995. But how have local families with low and tion and improvements in information moderate incomes fared in obtaining financing processing, is helping lenders do a better job of and increasing their rate of homeownership? constructing household financial histories and finding data to support the creditworthiness of Changes and developments in lower-income borrowers. Moreover, innovations home lending in financial markets, such as the development of A number of factors may have improved the mortgage-backed securities, are opening the flow of credit to low- and moderate-income bor- door for a wider group of investors and thereby rowers in recent years. One factor is a strong contributing to a more even flow of funds into economy that has provided one of the most the affordable housing market. stimulative environments on record for home- Public policy changes are providing an ad- ownership. The longest period of uninterrupted ditional incentive for lending to lower-income growth in U.S. history occurred between 1991 groups. The Community Reinvestment Act of

FALL 2005 . TEN 27 TABLE 1: HOME PURCHASE LENDING TO LOW- AND MODERATE-INCOME BORROWERS IN THE DENVER METROPOLITAN AREA (average annual amount)

1992-1994 1995-1998 1999-2002

Amount Share of All Amount Share of All Amount Share of All ($ Millions) Lending ($ Millions) Lending ($ Millions) Lending

All Low- and Moderate-Income Borrowers 918.4 21.9% 1,394.8 22.4% 2,419.3 22.7% Low- and Moderate-Income Borrowers in Low- and Moderate-Income Census Tracts 219.0 5.2% 361.4 5.8% 598.8 5.6% Low- and Moderate-Income Borrowers in All Other Census Tracts 699.4 16.7% 1,033.4 16.6% 1,820.5 17.1%

All Home Purchase Lending in Denver 4,187.6 100% 6,222.9 100% 10,670.2 100%

1977 (CRA), which focuses on how deposito- median household income in the Denver met- ry institutions meet the credit needs of the ropolitan area—benefit from the generally communities in which they maintain deposit- strong home lending market? This question is taking offices, was amended in 1990 to provide of particular importance to lower-income for public disclosure of supervisors’ CRA eval- households because financing plays a signifi- uations. Also, banking agencies implemented a cant role in their choice of housing and in their performance-based CRA rating system in 1995 financial prosperity. Also, recent housing

to provide quantitative measures of an institu- trends may provide some perspective on which

tion’s low-income lending activities. The factors and public policies have been most in- Home Mortgage Disclosure Act of 1975 fluential in expanding homeownership. “ “ How have local families with low and moderate incomes fared in obtaining financing and increasing their rate of homeownership? (HMDA), which requires mortgage lenders to As shown in Table 1, the dollar volume of publicly disclose information about their home home purchase lending to all low- and moder- lending in urban areas, has been amended sev- ate-income borrowers increased significantly eral times to expand the types of reporting from a yearly average of $918 million in the institutions and the information reported (see 1992-1994 period to a $2.4 billion average be- the sidebar on page 31 for a description of the tween 1999 and 2002. This growth, moreover, new loan pricing disclosures HMDA reporters exceeded the rate for all borrowers in Denver, must make). These changes are thus giving leaving low- and moderate-income borrowers community groups and public authorities a with a slight increase in their share of overall better means for comparing institutions’ home lending in Denver—from a 21.9 percent records on lending to lower-income groups. share in the 1992-1994 period to a 22.7 per- cent share in the final period. Given the very Lending to low- and moderate- rapid growth and price appreciation that oc- income borrowers curred in the middle and upper end of the Did low- and moderate-income house- Denver housing market during much of the holds—those with less than 80 percent of the 1990s, the fact that lower-income borrowers

28 FALL 2005 . TEN more than held their own represents a good of Denver, there are reasons why a lower rate sign of progress. might occur in lower-income neighborhoods, Table 1 also indicates that about three- for example staying in a home longer to take ad- fourths of all home lending to low- and vantage of terms in a special lending program or moderate-income borrowers occurs outside of because the costs of changing homes—such as low- and moderate-income areas. As a result, loan closing costs and real estate sales expenses— much of this lending is being dispersed into are proportionately higher. other parts of the Denver metropolitan area— a sign that lower-income borrowers may be Who is lending? finding a range of opportunities in housing, Another interesting aspect of low- and employment and public services. moderate-income lending is who is doing the The total amount of lending in low- and lending—have the major lenders stayed much moderate-income neighborhoods is also an im- the same over time, or are technologies and portant measure determining the stability and other factors bringing new players on the future, quality of life, and public services in scene? Independent mortgage companies were these areas. Moreover, the CRA stresses the im- the most common lenders across the Denver portance of local depository institutions metropolitan area and at all income levels. As a serving lower-income neighborhoods. Within group, they increased their lending in lower-in- Denver’s low- and moderate-income areas, the come neighborhoods from an average annual volume of lending to home purchasers at all in- rate of 3.06 loans per 100 owner-occupied come levels rose from a yearly average of $425 million during the 1992- CHART 1: HOME PURCHASE LOANS 1994 period to $1.3 billion between APPROVED PER 100 OWNER-OCCUPIED UNITS 1999 and 2002. This represents a 226 (Denver metropolitan area) percent rise compared to a 155 per- cent increase in home lending across all areas. As a result, low- and moder- ate-income neighborhoods have experienced a gain in their share of all home purchase lending, but this share is still just a little over one-eighth of all home lending in Denver. A more detailed way to look at the relative level of lending in low- and moderate-income neighborhoods is to compare the number of home purchase loans to the number of own- er-occupied housing units. This comparison helps adjust for housing differences across varying economic TRACT INCOME LEVELS levels, especially between neighbor- hoods composed of mostly rental housing and units in the 1992-1994 period to 4.55 loans in others where single-family homes and the need the 1999-2002 period. Some of the greatest for home financing may be more prevalent. As gains between these two periods, though, shown in Chart 1, the number of loans in low- were achieved by thrifts and banking organi- and moderate-income neighborhoods has zations without Denver deposit-taking jumped from an annual average of 5.6 loans offices, which tripled and quadrupled the per every 100 owner-occupied housing units to numbers of loans they made in low- and 9.2 loans. While this trails the 13.3 loans for all moderate-income neighborhoods.

FALL 2005 . TEN 29 Help for Denver’s low- and moderate-income homebuyers

BY ARIEL CISNEROS, SENIOR ADVISOR, COMMUNITY AFFAIRS ow interest rates played a major role in the surge of second quarter 2005: Almost 1,200 affordable homeowner- homeownership in Denver, but they are not always ship units developed, in both new construction and Lenough for low- and moderate-income (LMI) residents to rehabilitation. HDP support provided homeownership counsel-

attain homeownership. ing to approximately 1,500 families that purchased homes, along Even with low interest rates, some potential homebuyers still with assisting over 1,100 families considering homeownership have difficulty because they have low credit scores, limited funds and needing financial education. for downpayment and closing costs or a lack of available afford- Ray Stranske, executive director and founder of Hope able inventory. Communities, started Hope Communities, a community develop- To ease the burden on LMI families, various public and pri- ment corporation, in 1980, after a task force of citizens

vate partnerships and collaborations have developed products concerned with the lack of affordable, comfortable housing for and services that help prepare potential people with low incomes came together. home buyers and get them into homes. Hope Communities has developed the Along with financial education so that po- neighborhood, with over 60 units for sale tential homeowners can get on the right Much of this lending is along with over 700 units of affordable financial track, there is pre- and post- home “ rental housing. Hope has rehabilitated and buyer education and counseling, down- being dispersed into built new construction, including a mixed payment and closing cost assistance, and use development along the light rail corri- an ongoing effort to develop a viable in- other parts of the dor. Hope’s office and most of its housing ventory of affordable housing. units are located in the diverse Five Points Many Denver LMI residents have Denver metropolitan neighborhood, just north of downtown benefited from funds that were passed Denver. through to aid organizations by area — For-profit developers are also filling NeighborWorks America, which is part some of the need for affordable housing, or of the NeighborWorks system, a nation- a sign that lower- workforce housing, for individuals and fami- al collaborative effort of businesses, lies that are 80 percent or below the government officials, residents and many income borrowers may median income. At Stapleton, the former air- other partners. Rocky Mountain Mutual port for the city of Denver, and now a Housing Association, Inc., an affiliate of be finding a range of redevelopment for housing and commercial NeighborWorks America, has been pro- space, units of affordable housing, in one viding home buying opportunities along opportunities in development, have a starting sales price of with homebuyer and financial education “ $99,990 for a one bedroom unit, $129,990 for its clients for many years. The organi- housing, employment for a two bedroom and $159,990 for a zation has developed partnerships with three bedroom condominium. local financial institutions, local government and public services. Through inclusionary zoning (IZ), the and housing authorities to provide these city of Denver is promoting the develop- needed services for potential homebuyers. ment of more units of affordable housing, Colorado Housing Enterprises, LLC, a part of Colorado requiring developers that develop more than 30 units of hous- Rural Housing Development Corporation, also helps limited-in- ing in a single development to provide 10 percent of the units come families with home buying by providing homebuyer as affordable for a population earning less than 80 percent of education and downpayment assistance. the area median income. Assisting on the development side, the Housing Public and private partnerships involving government, the Development Project (HDP), a collaboration of the Enterprise nonprofit community, and the private sector, including financial Foundation, Denver area banks and corporations, the City institutions, have been developing appropriate and flexible and County of Denver seeks to build the capacity of nonprof- lending tools, financial education, pre- and post homebuyer it community development organizations to develop, manage education and counseling, and developing units of affordable and preserve affordable housing benefiting LMI people and housing that will support safe and decent neighborhoods in a neighborhoods in metro Denver, says Lisa Goldberg, senior high cost community like Denver. program director for HDP. HDP supported local nonprofit housing developers to accomplish the following from 1993 to T

30 FALL 2005 . TEN NEW HMDA LOAN In response to the growth of the subprime mortgage mar- Lending progress During a period of rapid ket and concerns about higher-rate loans, the Federal Reserve growth in home lending expanded the HMDA reporting regulations to include selected throughout the Denver area, loan pricing data. For home purchase, refinance or secured low- and moderate-income home improvement loans, lenders must now report the spread borrowers income neighbor- between the annual percentage rate on a loan and the yield hoods have thus experienced on Treasury securities of comparable maturity, provided this an increase in their share of all spread exceeds three percent on first-lien loans and five per- home purchase loans. In addi- cent on subordinate-lien loans. As of March 31, 2005, lenders tion, the level of lending in relation to the number of must disclose their loan pricing data to anyone upon request, owner-occupied housing units and edited, aggregate data was made available on has increased significantly in September 13, 2005. low- and moderate-income These disclosures will not provide a complete picture of neighborhoods. These results loan pricing practices, since several factors relevant to the pric- suggest that home financing ing of loans will be missing—most notably, loan-to-value ratios, has become more readily credit scores and histories, and borrower debt-to-income ratios. available to lower-income The pricing data, though, will serve as a starting point for com- households, thus ensuring munity groups and lenders to discuss loan pricing policies, greater progress toward their homeownership goals. identify higher-rate markets in need of more competitive entry Some of the factors and obtain better information on where to look for credit. behind this progress undoubt- edly are a strong economy, declining interest rates, and PRICING DISCLOSURES greater regulatory incentives. An additional and very note- worthy development, though, is the increasing role that banking organizations and thrifts without continuous and competitive source of financ- Denver deposit-taking offices are playing in ing will be available to support lower-income low- and moderate-income home lending in neighborhoods. Denver. The fact that these organizations T have overcome the lending advantages that local institutions once held suggests that in- novations in technology and financial markets are dramatically reshaping our mort- gage markets and bringing new competitors into these markets. FURTHER RESOURCES From a longer-term perspective, the emergence of such competition should great- LOW- AND MODERATE-INCOME HOME FINANCING: ly benefit low- and moderate-income WHAT ARE THE TRENDS IN KANSAS CITY? borrowers, while providing a sign that lower- www.KansasCityFed.org/TEN income lending can meet the same market tests as other forms of lending. To the extent this is true, a broader range of lenders and in- vestors will develop to serve low- and COMMENTS/QUESTIONS are welcome moderate-income households, and a more and should be sent to [email protected].

FALL 2005 . TEN 31 Notes

Bank’s Community Affairs Department, development. Three steps are essential in fram- Kauffman Foundation to host ing that role. The first is to define what regional entrepreneurship conference development policy is today. The report provides a comprehensive review of current federal pro- The Community Affairs Department of the grams and how federal dollars are spent on Federal Reserve Bank of Kansas City, in partner- regional development. It shows that federal pro- ship with the Kauffman Foundation, will host a grams are highly fragmented today, that conference exploring opportunities for and chal- programs largely assume that all regions grow the lenges facing entrepreneurship in low- and same way and that federal spending is focused moderate- income (LMI) communities. heavily on physical infrastructure. The conference, which runs November 3 The second step is to identify what makes and 4 in Kansas City, Missouri, will present a regional economies grow in the 21st century. number of studies commissioned specifically for The report reviews the economics literature and this conference, including entrepreneurship’s role highlights state-of-the-art thinking on regional in reducing problems unique to LMI communi- growth. It shows that economists believe the ties, entrepreneurship’s current presence in LMI drivers to regional growth have changed dramat- communities, challenges facing entrepreneurship ically over the past decade and that regions now in LMI communities and accounting for varia- grow when they gain a competitive edge in rap- tion in entrepreneurial success. The final session idly changing global markets. Within this new will provide an overview of the findings present- context, a region’s capacity to innovate and its ed and suggest future studies needed in the area ability to grow entrepreneurs are keys to success. of entrepreneurship in LMI communities. The final step is to consider how federal A compilation of the presented works will policy might change to help regions grow in be made available shortly after the conference via the future. Three shifts in federal policy will be the main Community Affairs webpage at important if the nation wants to help regions www.KansasCityFed.org/comaffrs/caconferences.htm. hone their competitive edge:

Special report from the Center for the Study of Rural America now available 1. Make regional competitiveness the goal of federal regional development policy and “A Review of the Federal Role in Regional align federal development programs Economic Development,” a special report pre- accordingly. pared by Mark Drabenstott, vice president and 2. Design new efforts to help regions seize director of the Center for the Study of Rural innovations and grow entrepreneurs. America, is now available. 3. Create an effective delivery system for tak- In 2004, the federal government spent ap- ing federal programs to regions around proximately $17 billion on economic the nation. development programs aimed at specific areas and communities. The Center’s report examines current fiscal policy with regard to economic re- The full report is available at gions, and highlights the need for a redesign of www.KansasCityFed.org/TEN and will be avail- economic development grant programs. able in hardcover via the Center’s main page at The report frames what the federal govern- www.KansasCityFed.org/RuralCenter/RuralMain.htm. ment’s future role could be in regional economic

32 FALL 2005 . TEN

FIRST STATE BANK OF NEWCASTLE, Bank hosts Oklahoma Economic Newcastle, WY...... 75 Forums, plans for ‘06 Forums CENTENNIAL BANK OF THE WEST Fort Collins, CO ...... 68 The Federal Reserve Bank of Kansas City FARMERS STATE BANK, Fort Morgan, CO...... 67 recently hosted Economic Forums in four STOCK EXCHANGE BANK, Caldwell, KS...... 65 Oklahoma locations and officials are currently GRANT COUNTY BANK, Medford, OK...... 65 planning for Forums events in other Tenth FIDELITY STATE BANK & TRUST COMPANY Dodge City, KS ...... 62 Federal Reserve District states in 2006. FIRST STATE BANK, Fairfax, OK...... 60 In the Economic Forums program, which BANK OF COMMERCE, Wetumka, OK...... 60 was created 50 years ago, Bank economists vis- FIRSTIER BANK OF WYOMING, Upton, WY.58 it local communities where they make FARMERS STATE BANK, Pine Bluffs, WY ...... 39 presentations on the regional economy and na- BANKERS’ BANK OF THE WEST tional economic outlook. Through question Denver, CO...... 25 and answer sessions, as well as informal discus- CITIZENS STATE BANK & TRUST COMPANY Ellsworth, KS...... 25 sion, the economists are able to gain first-hand PREMIER BANK, Denver, CO...... 5 insight into the District economy while local SWEDISH-AMERICAN STATE BANK residents are able to learn more about the Courtland, KS...... 5 Federal Reserve’s perspective on economic is- TILDEN BANK, Tilden, NE ...... 5 sues. As his schedule permits, Bank President CITIZENS BANK, Velma, OK...... 5 Thomas Hoenig speaks to Forums audiences. GUARANTY BANK & TRUST COMPANY The Forums program is on a two-year cy- Denver, CO...... 1 cle, meaning that Bank economists and staff KAW VALLEY STATE BANK & TRUST COMPANY Wamego, KS...... 1 visit all regions of the seven-state District at FIRST STATE BANK, Lincoln, NE...... 1 least every two years. In 2005, Oklahoma Forums in Clinton, FURTHER RESOURCES McAlester, Oklahoma City and Tulsa during September followed spring Forums in Research from the Federal Reserve Bank of Kansas City avail- Colorado that were held in Colorado Springs, able at www.KansasCityFed.org/TEN: Denver, Durango, Fort Collins and Grand Junction. In the spring of 2006, the Forums WHO IS PROCESSING YOUR PAYMENTS? A LOOK AT program will visit locations across Kansas and THE MANY ROLES NONBANKS PLAY IN PAYMENTS ACTIVITIES AND THE OVERSIGHT QUESTIONS THAT in western Missouri, while in the fall, the pro- ARISE AS A RESULT gram will visit communities in Nebraska, New Mexico and Wyoming. CREDIT UNION GROWTH IN THE TENTH FEDERAL Invitations to the 2006 Forums will be RESERVE DISTRICT: HOW LEGAL AND REGULATORY mailed to bankers, business and community CHANGES HAVE AFFECTED CREDIT UNION EXPANSION leaders as the events approach. Those interested in ensuring that they will receive an invitation SMALL BANK LENDING: TAPPING OPPORTUNITIES FOR can email: [email protected]. There is no RURAL GROWTH charge for attending Forums events. WHAT CAUSED THE GREAT MODERATION; THE SHARED FORTUNES OF CITIES AND SUBURBS; Banks Marking Milestones as Federal GAUGING A REGION’S ENTREPRENEURIAL POTENTIAL Reserve Members NEXUS, THROWBACKS, AND THE WEIGHTING GAME BANK OF VERSAILLES, Versailles, MO ...... 86

FALL 2005 . TEN 33

About... BY TIM TODD, EDITOR

ederal Reserve Chairman Alan pendent within the government” structure. Greenspan is the second-longest Although the twelve regional Federal Reserve serving chairman in the history of Banks are not government agencies, the Board of F the nation’s central bank, trailing Governors of the Federal Reserve System, which only William McChesney Martin, Jr. has broad oversight responsibility for the opera- Greenspan and Martin, who both served tions and activities of the regional Reserve Banks, more than 18 years, are clearly the exceptions. is a government agency. There is only one other chairman who even be- As such, Board members are appointed by gins to approach that length of service: Marriner the president and confirmed by the Senate. Eccles, who served as chairman for 13 years. Board members serve 14-year terms and are not However, when it comes to total years of eligible for reappointment to a second full term. service, Eccles nearly equals Greenspan and However, governors who are initially appointed Martin. His time on the Board of Governors to the Board to complete the unexpired portion spanned nearly 17 years and encompassed one of of a term may be reappointed and, once con- the most important periods in the history of the firmed by the Senate, can serve a full 14-year term. nation’s independent central bank. It is not uncommon for Board members to resign their positions prior to the completion of The terms of office their terms. Because of the number of early de- Because of the way terms of office are struc- partures over the years, several governors have tured on the Board of Governors, it is unlikely been appointed to the Board to complete an un- that a future Federal Reserve chairman will rival expired term. It is somewhat uncommon for a Greenspan or Martin for their length of service. member who completes the unfinished term to The Federal Reserve has a unique “inde- be reappointed to a second term. Rarer still is the

34 FALL 2005 . TEN appointee who then completes that second term. ated four-year terms for the offices of chairman There are, however, a few notable exceptions. and vice chairman—known prior to the 1935 Greenspan was appointed to the Board as its Act as governor and vice governor. chairman on Aug. 11, 1987, completing the un- Eccles, a former Utah banker who had held expired term of his predecessor, Paul Volcker. a position in the Treasury prior to his Board ap- Regardless of when an appointee begins pointment, was the chairman. He would serving on the Board, the terms of office do not complete an unexpired Board term and be reap- change. The unexpired term that Greenspan was pointed to another term by President Franklin appointed to complete ended on Jan. 31, 1992. Roosevelt. After his initial appointment to the He was reappointed to the Board and began newly titled chairman’s position in 1936, he serving his full 14-year term the following day. would be reappointed as chairman by Roosevelt That term will conclude on Jan. 31, 2006. in 1940 and 1944. The term of a chairman is a separate matter. In the midst of World War II, it was an in- The president selects a chairman and a vice teresting period for the chairman, whose names are then submitted to Federal Reserve. the Senate for approval. The nominees for these Although the secre- positions must either be current members of the tary of the Treasury had Board of Governors or, as is usually the case with been removed from the the chairman’s position, simultaneously appoint- Board of Governors by ed to a position on the Board of Governors. the 1935 Act, there was Similarly, a departing chairman who re- significant friction be- signs that position will usually vacate his seat tween the agencies on the Board of Governors. However, because relating to numerous is- they are separate terms, it is possible to have a sues. Chief among them former chairman continuing to serve as a was the expectation that member of the Board. the Federal Reserve It has happened once. would implement poli- cies supporting the Eccles and Martin prices of long-term gov- Marriner Eccles was appointed to the Board ernment debt, thereby William McChesney Martin, Jr. in 1934, but he is sometimes referred to as the helping to finance gov- Federal Reserve’s first chairman because of ernment spending. sweeping changes in the Board’s structure occur- “The pattern of war finance had been ring during his tenure. firmly established by the Treasury, the Under the provisions of the Federal Reserve Federal Reserve merely executed Treasury de- Act signed by President Woodrow Wilson in cisions,” Eccles writes in his 1951 book, 1913, the Federal Reserve Board was comprised Beckoning Frontiers: Public and Personal of seven members: five appointees along with the Recollections. comptroller of the Currency and the secretary of The arrangement also eventually con- the Treasury, who was ex-officio chairman. tributed to increasing inflationary pressures. The Banking Act of 1935 made several In 1948, with President Harry Truman in changes, including changing the name of the office, Eccles, who had been an opponent of Federal Reserve Board to the Board of Governors these Treasury-mandated yield rates, was not of the Federal Reserve System. The Act also reappointed to the chairmanship. changed the Board’s composition into seven ap- In his book, Eccles relates the conversa- pointed positions, requiring the secretary of the tion where John Steelman, the president’s Treasury and the comptroller of Currency to special assistant, informs Eccles that he will both leave the Board in 1936. The Act also cre- not be reappointed:

FALL 2005 . TEN 35 “The [P]resident has given me a very un- ment’s requirements and, at the same time, to pleasant assignment. I am to inform you that he minimize the monetization of the public debt.” is not going to redesignate you as [C]hairman of Alan Meltzer explains the significance of the Board of Governors. But he told me to be the accord in his 2003 book, A History of the sure you understand that he wants you to stay on Federal Reserve. as a member of the Board,” Steelman said, ac- “For the first time since 1934, the Federal cording to Eccles’ account of the meeting. Reserve could look forward to conducting mon- Eccles, who thought he had a strong rela- etary actions without approval of the Treasury,” tionship with Truman, was surprised by the Meltzer writes. “The accord ended ten years of news. After Roosevelt’s death in 1945, Eccles inflexible rates, following seven years of inactive said he offered to step down so Truman could and inflexible policies.” appoint a new chairman “of his own choice.” McCabe would resign five days later, after Eccles said he was told at that time by Truman reportedly being told by the president that he that such a change was not necessary. was no longer needed.

After being told of the president’s decision William McChesney Martin, Jr., who had

by Steelman, Eccles requested and was granted a been the Treasury official handling that agency’s meeting with Truman. In his book, Eccles said side of the accord negotiations, then was ap- “ “ For the first time since 1934, the Federal Reserve could look forward to conducting monetary actions without approval of the Treasury. that, during the meeting, Truman personally pointed chairman of the Federal Reserve by asked Eccles to remain on the Board, plead- Truman. Eccles, meanwhile, was still on the ing with him, “Please stay and help me. I Board and would remain there for a few months need your help.” before resigning. Eccles, after consulting with friends, agreed Although Fed watchers of the day might to continue to serve as a member of the Board of have expected Martin’s appointment to essential- Governors even though he would no longer be ly negate some the independence gained by the its chairman. Federal Reserve through the accord, that would “I swallowed my pride,” he would later write. not be the case. During his tenure, Martin would To replace Eccles as the chairman, Truman protect the Federal Reserve’s independence and appointed Thomas B. McCabe, a Pennsylvania sometimes today is referred to as the creator of banker and businessman who led Scott Paper the modern Federal Reserve. Presiding during Company from a relatively small operation into periods of strong economic growth, Martin is a multinational firm. McCabe would have a brief also well-known for making the often-repeated tenure at the Federal Reserve, serving as chair- statement that the role of a central bank is to man for less than three years. “take away the punch bowl just when the party McCabe’s resignation would come only gets going.” days after the announcement of what is known After finishing the first term, Martin was as the Treasury-Federal Reserve Accord, an agree- appointed to serve a full 14-year term. When ment to resolve the ongoing disputed issues Martin’s full term expired, he had served as chair- between the two agencies. man of the Board of Governors for a record 18 The statement issued March 4, 1951, reads: years and nine months. “The Treasury and the Federal Reserve System have reached full accord with respect to T debt-management and monetary policies to be pursued in furthering their common purpose to COMMENTS/QUESTIONS are welcome assure the successful financing of the [G]overn- and should be sent to [email protected].

36 FALL 2005 . TEN Online Resources THE BANK HAS A NUMBER OF ONLINE RESOURCES AVAILABLE ON BANKING AND ECONOMIC ISSUES: Fed BOARD OF GOVERNORS: www.federalreserve.gov directory FEDERAL RESERVE PUBLICATIONS: www.newyorkfed.org/publications EDUCATOR AND STUDENT RESOURCES: www.FederalReserveEducation.org

OMAHA BRANCH (402) 221-5500; (800) 333-1040 FEDERAL RESERVE BANK OF KANSAS CITY (816) 881-2000; (800) 333-1010 DENVER BRANCH (303) 572-2300; (800) 333-1020

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